Moscow News
www.MN.Ru
July 26, 2007
Brace for a Fall!
By Yevgeny Tyapkin
Last week, MICEX and the RTS Index hit new highs - 1,817 and 2,087 points respectively. The Russian stock market surge occurred at a time when Western bourses and prices for fuel and energy were in favor of buyers. Thus, the uptrend which began in late May 2007 continues and Russian investors are taking advantage of it.
Western markets had become buoyant on the publication of strong financials by the top U.S. corporations, and this gave a boost to Russian equity performance. American stock indexes last week also indicated strong growth.
American investors were diverted from the problems of the subprime mortgage market. These problems still exist, and Federal Reserve Chairman Ben Bernanke drew attention to them when he addressed the Senate Banking and Currency Committee a fortnight or so ago. In this regard, Russian investors too should be on the alert.
The crisis on the subprime mortgage market persisted last week, generating credit risks. In his semiannual report to Congress on monetary policy, Bernanke announced that the losses from bad loans connected with the subprime market crisis were rather substantial. According to some estimates, the losses on low-rated credit products may amount to between $50 billion and $100 billion, he said.
Standard & Poor's last week downgraded its ratings for many subprime Residential Mortgage-Backed Securities (RMBS). Its rating for 10 tranches of CDOs (Centralized Debt Obligations) was lowered to the level of junk bonds. All that is fraught with the danger of mass sales on debt-instrument markets, leading to the depreciation of the respective assets, and to a sharp decline in the financial performance of the United States' mortgage banks. Such a possibility has already been reflected in an augmentation of monetary reserves set aside by the top U.S. banks to cover any likely losses.
One may wonder what the American mortgage bonds market has to do with the Russian stock market. It's simple: The American financial and banking sector has a tremendous influence on the U.S. stock market owing to the sector's significance and weight (around 20 percent) in the composition of the of the S&P 500 Index. Any loss of liquidity in this sector will instantly be reflected in the entire American stock market, and this is bound to intensify sales throughout the Russian stock market.
Last week, Sberbank of Russia carried out a stock split in the ratio of 1,000:1 for ordinary shares and 20:1 for preferred shares. Now the nominal value is three rubles for both ordinary and preferred shares. After the stock split, MICEX began to trade in Sberbank shares, starting on Friday, July 20. The split alone is unlikely to add much to the growth potential of Sberbank stock. This stock retains its long-term growth potential thanks to its strong fundamentals (we put its value at $4.4 per share). In the immediate future, however, these blue chips will perform like the rest of the market.
Vneshtorgbank (VTB) stock has a far higher growth potential. Its share price has been around 1.4 kopeks for just under two months, and over that time, trading in the bank's shares has been sluggish. Recall that it took Rosneft's share price two months to stabilize after the oil major held an IPO. Comparing certain features in the performance of the two banks, we may predict that VTB quotes will start climbing toward the end of July, or at the very start of August.
In this situation, we advise investors to be very careful in their choice of stocks to buy. It has to be borne in mind that the richest market player always wins, and that an uptrend cannot go on forever. Hence, it follows that now is the time to abide strictly by this market principle: Take profits after a sturdy growth and don't overstay in long positions.